What the blockbuster FCC vote means for cable-cord cutters

TV fans on the fence about ditching their cable boxes may want to think twice after the Federal Communications Commission on Thursday voted 3-to-2 along party lines to propose “net neutrality” rules that could allow Internet service providers to charge content providers like Netflix
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, YouTube and Hulu for faster and higher delivery of their traffic to users. If this cliffhanger vote does mark the end of “net neutrality,” then the cost of cutting the cord in favor of streaming shows could soon rise, experts say.

The vote came after a decision earlier this year by the U.S. Court of Appeals in Washington, D.C., which rejected the FCC’s so-called open-Internet rules, paving the way for cable companies to give some broadcast companies and video streaming services preferential treatment. The 2010 Federal Communications Act forced companies like Comcast and Verizon Communications
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to treat all video streaming equally. “Net neutrality puts users in control,” says David Sohn, general counsel at the Center for Democracy and Technology, a non-profit public interest group in Washington, D.C. “Services succeed or fail based on what users like and — until now — YouTube, Netflix and Hulu didn’t have to worry about striking a deal with the Internet service providers.”

For his part, FCC chairman Tom Wheeler says he’s still committed to an open Internet. Although the proposed new rules allow companies to strike deals with content companies for fast-tracking content, for instance, the FCC’s proposed new Internet rules would still prevent broadband providers from actually blocking or slowing down websites. “There is one Internet. It must be fast, it must be robust, and it must be open,” he told an FCC hearing on Thursday. “The prospect of a gatekeeper choosing winners and losers on the Internet is unacceptable.”

But an end to “net neutrality” could also have unseen consequences for consumers, making life more difficult for the YouTubes and Netflixes of tomorrow. “If history is any guide, it’s likely that a lot of people will be using new online services that don’t exist today or really aren’t on anybody’s radar screen,” Sohn says. “But a multi-tiered Internet service creates a whole new entry barrier.” And Netflix — now one of the biggest players with 31.1 million U.S. subscribers — already works with Internet service providers to secure faster streaming speeds. “ISPs with a direct Netflix connection will continue to deliver the best Netflix experience,” according to Netflix. It has a monthly “Netflix ISP Speed Index” based on service providers within the U.S. Google Fiber
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and Cablevison
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are ranked Nos. 1 and 2, while TimeWarner Cable
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and Comcast are ranked Nos. 7 and 8, according to the latest update.

This vote will be bad for cord cutters, especially if they get their broadband from a cable company, says technology analyst Yung Trang. “Cable companies and other broadband providers have an incentive to slow down the delivery of bandwidth-hungry competing services like Netflix and Hulu,” he says. If net neutrality is eroded, cable companies will likely charge Netflix, Hulu and YouTube to prioritize their services and could even limit the quality of those services the same way wireless companies “throttle” heavy data users. “Netflix and Hulu could pass these costs on to the consumer if they don’t want to eat into their profit and YouTube might force users to watch more ads to make up the additional cost.”

The FCC’s official mission to preserve “net neutrality” only goes so far. It does not apply to the recent agreement between Netlfix and Comcast, in which Netflix agreed to pay the cable company for direct access to its cable lines. The deal effectively replaces the middlemen who normally do the job already, but also paves the way for a slew of similar deals between major broadband companies and content providers. Net neutrality aims to ensure that Internet service providers like Comcast or Verizon don’t discriminate against or give preferential treatment to traffic from Netflix or YouTube on the last mile of cable that connects the Internet to peoples’ homes. The Netflix-Comcast deal, however, only provides direct access to that last mile of cable.

Not everyone is so sure that consumers will lose, however. “It’s hard to say how aggressive broadband providers will be in trying to get content owners to pay,” says Nick Del Deo, senior research associate at MoffettNathanson. Cable companies are keenly aware that video streaming services are extremely popular with the public, he says. “A plea from Internet companies — among the most beloved companies in America — to restrain big bad cable and telephone companies and demonize them as monopolists would likely find a receptive audience,” Del Deo says. Indeed, video streaming companies have won over a significant number of customers over the last year: 38% of Internet users subscribed to Netflix in 2013, up from 31% in 2012 — although some of them likely have shared accounts, according to research firm Nielsen; 13% used Amazon Prime Instant Video in 2013 versus 7% in 2012; 18% used Hulu in 2013, up from 12%.

However, making sure that video streaming companies are not being “throttled” with slower speeds may not solve the long-term problem, says William Rinehart, director of technology and innovation policy at the American Action Forum, a center-right policy institute. “Cord cutting has risen in popularly because content migrated to the Internet and broadband is fast. Yet streaming does place a burden on the network, which needs to be recouped,” he says. “Allowing for innovative business arrangements will ensure continued fast speeds and more content.” Technology analyst Jeff Kagan agrees that consumers could be given the choice to download a movie for free at a slower speed or for a higher price at a faster speed. “It’s not settled yet.”

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